The difference between the book value of bonds converted into investment among rehabilitation claims and the market value of the stocks issued shall not be subject to bad debt tax deduction.

It is difficult to deny the substance of the stock payment as a payment for the stocks by removing only the excess portion of the market price of the stock among the debt to be converted into a debt. Thus, in the event that a decision to authorize the rehabilitation plan accompanying the issuance of new stocks is made, it shall be deemed that the effect of the extinction of the debt shall accrue not only to the excess portion of market

Article 45 of the Value-Added Tax Act (Special Cases)

2016Guhap52390 Revocation of Disposition of Imposition of Value-Added Tax

AA by the receiver of ○○○○ Construction Corporation

○ Head of tax office

November 8, 2016

January 10, 2017

1. On February 1, 2016, the Defendant’s imposition disposition of value-added tax of KRW 189,572,160 against the Plaintiff on February 1, 2016 exceeding KRW 36,616,630 shall be revoked.

2. The plaintiff's remaining claims are dismissed.

3. One-fifth of the costs of lawsuit shall be borne by the Plaintiff, and the remainder by the Defendant, respectively.

Cheong-gu Office

The Defendant’s imposition of value-added tax of KRW 189,572,160 against the Plaintiff on February 1, 2016 shall be revoked.

1. Details of the disposition;

A. ○○○○○ Construction Co., Ltd. (hereinafter referred to as “○○○○○ Construction”) was engaged in civil engineering and construction works, etc., and obtained the approval for its rehabilitation plan from the Seoul Central District Court on October 31, 2013 (hereinafter referred to as “instant rehabilitation plan”).

B. The instant rehabilitation plan provides that “The principal and interest accrued prior to the commencement of the rehabilitation plan shall be converted into equity and 79.5% shall be paid in cash, and 20.5% shall be paid in cash, and the debt to be converted into equity shall be substituted for the repayment of the rehabilitation claim in question on the date when the new shares

C. According to the instant rehabilitation plan, rehabilitation creditors converted the remaining amount of claims repaid in cash out of the rehabilitation claims against ○○○○ Construction (hereinafter “instant rehabilitation claims”) into investments at the ratio of KRW 1,274 per share.

D. A rehabilitation creditor is deemed to have suffered a bad debt tax under the Value-Added Tax Act on the difference between the book value of a debt-to-equity swap among rehabilitation claims against ○○○ Construction and the market value of the shares issued through a debt-to-equity swap (hereinafter “the difference in this case”), and thus, was deducted from the amount equivalent to the value-added tax.

E. On February 1, 2016, the Defendant denied the Plaintiff’s input tax deduction corresponding to the portion of the bad debt tax deduction, and imposed a disposition imposing KRW 189,572,160 on the Plaintiff (hereinafter “instant disposition”). The specific amount of the instant disposition is as indicated below.

[Indication of List]

F. The Plaintiff dissatisfied with the instant disposition and filed a request for examination with the Commissioner of the National Tax Service on April 21, 2016, but the Commissioner of the National Tax Service dismissed the request on June 10, 2016.

[Ground of recognition] Facts without dispute, Gap evidence 1 to 3, Eul evidence 1 to 3, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The Defendant rendered the instant disposition by deeming the difference as falling under the “bonds confirmed to be impossible to be recovered according to a decision to authorize the rehabilitation plan under Article 19-2(1)5 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 25194, Feb. 21, 2014; hereinafter the same) as being subject to a bad debt tax deduction under Article 45 of the Value-Added Tax Act. However, according to Article 72(1) of the former Enforcement Decree of the Corporate Tax Act, the acquisition value of shares following a debt-to-equity swap cannot be deemed as having been bad debt amount because it is the book value of the bonds converted to-equity swap, and even in light of the method and purpose of the debt-to-equity swap under the Debtor Rehabilitation Act, even according to the legal principle of the issuance of new shares under the Commercial Act, the difference in this case is deemed to have been repaid, and thus, the portion of the instant disposition cannot be deemed to be unlawful as being subject to a bad debt tax deduction under the Value-Added Tax Act.

B. Relevant statutes

Attached Form is as shown in the attached Form.

C. Determination

1) Article 45(1) of the Value-Added Tax Act provides that where an entrepreneur is unable to recover all or part of his/her credit sales or other sales claims supplied goods or services subject to the imposition of value-added tax due to his/her bankruptcy or compulsory execution or other causes prescribed by Presidential Decree, an amount calculated according to the following formula (hereinafter referred to as "amount of bad debts") may be subtracted from the output tax amount for the taxable period whereto belongs the date when the bad debts are confirmed: Provided, That where the entrepreneur recovers all or part of his/her bad debts, the bad debts tax amount related to the bad debts amount shall be added to the output tax amount for the taxable period whereto belongs the date when the bad debts are recovered: The bad debts tax amount = 10/100, and Article 87(1) of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 26071, Feb. 3, 2015; hereinafter the same shall apply) provides that "the main sentence of Article 45(1) of the Value-Added Tax Act or other causes prescribed by Presidential Decree" as one of the Debtor Rehabilitation Act.

2) In light of the above provisions, the instant difference in light of the following circumstances:

Article 19-2(1)5 of the former Enforcement Decree of the Corporate Tax Act cannot be deemed to fall under “a claim confirmed as irrecoverable according to a decision to grant authorization for the rehabilitation plan or a court’s immunity pursuant to the Debtor Rehabilitation Act.” Therefore, the portion of the difference in this case cannot be deemed to fall under the subject of a bad debt tax deduction pursuant to Article 87(1) of the former Enforcement Decree of the Value-Added Tax Act. As such, the part of the disposition in this case, which denied the deduction of the difference in the Plaintiff’s input tax amount from the Plaintiff’s input tax amount on the disposition in this case (the Plaintiff does not dispute the part of bad debt tax deduction with respect to insolvent bills). Therefore, the portion exceeding 36,616,63

(1) The debt-equity swap is a type of debt and debt adjustment that the debtor issues equity securities to the creditor in order to repay all or part of the debt, thereby adjusting the debt through a change in the capital structure converted into his/her own capital. As can be seen, in cases where the debt-equity swap is to substitute for repayment of the existing debt through the method of issuing new shares, the agreement or agreement between the creditor and the debtor on the value of the existing debt which ceases to exist due to the debt-equity swap shall be followed, and in cases where there is no agreement between the creditor and the debtor, it is reasonable to view that the value of new shares is assessed as of the effective date of issuing new shares and the amount of existing claim equivalent to the appraised value has been repaid (see Supreme Court Decision 2008Da18376, Jul. 24, 2008). However, in cases of a rehabilitation plan, the rehabilitation creditor consent of more than 2/3 of the rehabilitation secured creditor and the consent of more than 3/4 of the rehabilitation secured creditor-4, as long as the rehabilitation plan has been authorized, the interested parties shall comply with the matters indicated in the rehabilitation plan.

Therefore, in the case of a rehabilitation company, since the agreement on the value of existing claims to be extinguished by conversion of investment exists under the rehabilitation plan, the principal obligation is extinguished as prescribed in the rehabilitation plan.

(2) Article 72(1) of the former Enforcement Decree of the Corporate Tax Act shall contribute to a debt with respect to the acquisition value of assets.

In principle, ‘stocks acquired through conversion' is based on the market price at the time of acquisition at the time of conversion. However, if a corporation whose rehabilitation plan including the content of conversion of debts into investments is authorized under the Debtor Rehabilitation Act, the book value of the converted bonds into investment shall be the acquisition value of stocks, and it shall not be subject to taxation at the time of conversion into investment.

③ The remaining rehabilitation claims that have been paid in cash according to the instant rehabilitation plan shall be extinguished by conversion of investment, and the acquisition value of shares to be acquired shall be deemed the book value of the bonds converted of investment.

④ Article 206(1) of the Debtor Rehabilitation Act provides that "the amount of liabilities to be reduced by the issuance of new shares" as one of the matters to be prescribed in the rehabilitation plan through debt-equity swap that entails the issuance of new shares. This provision also appears to be premised on the fact that when a rehabilitation creditor issues new shares when it is prescribed in the rehabilitation plan, the total amount of new shares to be converted into equity swap, i.e., the book value of shares converted into equity swap,

⑤ According to Articles 421 and 423 of the Commercial Act, in the case of issuance of new shares, the underwriter of new shares is obligated to pay the total amount of the subscription price with respect to the shares subscribed on the date of payment. If the underwriter of new shares fails to pay or make an investment in kind on the date of payment, the effect of the issuance of new shares is limited to the shares paid on the date of payment. In light of the legal relationship of the issuance of new shares, in the case of issuance of shares through a debt-to-equity swap, the whole debt to be converted into a debt-to-equity swap is deemed to have been paid as the subscription price for the shares, but the issuance of new shares takes effect for the whole shares to be issued. As a result, it cannot be denied the substance of the shares as the payment for the shares (see Supreme Court en banc Decision 2010Du17564, Nov. 22, 2012).

3. Conclusion

Therefore, the plaintiff's claim is accepted on some grounds, and the remainder is dismissed as it is without merit. It is so decided as per Disposition.